Internal Audits Fix Financial Accounting Problems –

Executive Summary –

MANY BUSINESSES PUT their blind faith in reactive reporting by their auditors or accountants and expect that their tax manager through the route of normal tax compliance will resolve all tax risks. In the difficult regulatory environment that taxpayers operate in, this is not a prudent tax risk management strategy. Businesses need to have their own internal control and check mechanisms. The tax team that has been formed will also assist in performing internal audits associated with tax risk management. They must be privy to all information, subject to legal privilege, in order to identify, analyze, and solve tax risks effectively, such as accounting provisions, for instance. The tax team, with internal Read More

More Facts Resolve Tax Risks –

Legal Privilege –

ANY OPINIONS OBTAINED from the outset, before and pursuant to an IRS query, must be protected by legal privilege . This will ensure they do not have to be disclosed to the IRS at all, even if the matter eventually goes to court.

Opinions may contain qualifications or provisos. For example, counsel may arrive at a finding on the assumption of something. If this gets into the IRS’s hands, they could focus on that qualification and misinterpret it entirely.

Taxpayers must make sure to furnish counsel with every last detail in order to avoid such Read More

More Facts Resolve Tax Risks –

The Essence of a Transaction –

THE ENTIRE TRANSACTION, and its individual parts, must be carefully scrutinized to ensure that each component is legally and properly implemented. It may be that one of the transaction legs was not implemented properly by the financial institution and is therefore invalid. This flaw, if a fundamental pillar of the transaction, could shift the liability to the financial institution, or another party that failed to execute it properly.

In summary, the taxpayer must investigate the transaction from all angles as they will be held accountable. In recent times, it has become apparent that with the execution of a Read More

More Facts Resolve Tax Risks –

Aiming toward a Letter of Findings –

IDEALLY THE TAXPAYER’S representatives should attempt to establish a high-level relationship with representatives from the IRS. In so doing, an introductory meeting should be convened wherein the representatives discuss the way forward and the amicable approach they intend to adopt.

This is also an important forum for the taxpayer to emphasize that a letter of findings must be issued by the IRS prior to any assessments and that the taxpayer be given reasonable opportunity to respond to the letter of findings. Read More

More Facts Resolve Tax Risks –

Repricing Agreements –

A REPRICING AGREEMENT can be in the form of a separate agreement, a clause, or an addendum; but it essentially provides for circumstances which occur or manifest later into the transaction and which impacts on the financial model of the structure, which may not have been contemplated.

Circumstances may include the introduction of and changes to any law, rule, regulation, directive, or banking practice applicable to the transaction, the rate and practice of levying tax, damages, and other costs which may become payable due to a breach. Of course Read More

More Facts Resolve Tax Risks –

Bringing the Financial Institution to the Party –

THE FINANCIAL INSTITUTION played the main role in selling the transaction product to the taxpayer and most times assured the taxpayer that the structure was not untoward in light of expert opinions obtained. Accordingly, the financial institution should be held partially responsible for their role in devising and offering the product.

Similarly, the opinions the financial institution obtained could assist the taxpayer’s case and should be disclosed to the taxpayer, who in turn may elect to provide the contents to the IRS. Read More

More Facts Resolve Tax Risks –

Interact with Financial Institutions –

INVOLVE THE RELEVANT financial institution right from the start. They must be made aware, up front, that they are to advise the taxpayer of any IRS queries they receive and that any documentation and/or information they intend to furnish in response thereto must be reviewed and approved by the taxpayer before it is submitted.

Before the financial institution answers any queries, it is essential that the taxpayer receive all the records in the financial institution’s possession pertaining to the transaction. Read More

More Facts Resolve Tax Risks –

Obtaining the Facts –

AS SOON AS the IRS query is received, a full factual inquiry should be performed by the taxpayer.

Ideally a taxpayer should preempt any IRS investigation when it comes to transactions previously concluded and start compiling and saving records as soon as possible. Apart from the written documentation, it is important to identify the key role players involved at the time the transaction was discussed and entered into. Such role players should be interviewed. This may be necessary down the line as these role players could be called to Read More

More Facts Resolve Tax Risks –

How to Question the IRS –

IN CERTAIN CIRCUMSTANCES it may become apparent that the IRS query is a “fishing expedition.” The taxpayer has rights to ask the IRS what the relevance of their questions is and to clarify ambiguous requests. The taxpayer is entitled to know precisely what the administrative purpose of the query is. In this regard the taxpayer may pose questions set out in the TQQ in the Tax Risk Management Dictionary” at the beginning of this special report (please take note of the disclaimer at the end of the definition of TQQ at the beginning of this special report).

Read More

More Facts Resolve Tax Risks –

The IRS Query –

THE INITIAL LETTER from the IRS will usually request from the taxpayer a list of documentation and information.

Whenever the IRS requires a taxpayer to furnish documentation and information, the IRS must state the administrative purpose for which it is sought.

All information provided must be of a factual nature; and the IRS is not entitled to information that extends to the realm of ideas, opinions, or judgments. Read More